These people almost always earn more than $200,000 a year and so qualify as "accredited investors" under the SEC's definition. Keep in mind, too, that start-ups can compensate their unaccredited employees with equity just the same.
Disclaimer: I am not a lawyer. This is not legal nor securities advice.
Actually not, because accredited investors must have cleared $200k for the two previous calendar years and most people who co-invest under the knowledgeable employees exemption are PE associates who have been on the job for less than two years.
Source? (Private equity associates are entry-level number crunchers. Their fraction of carry is a rounding error, if positive.)
Private equity associates very rarely receive carry, which is why they co-invest instead.
*edited for clarity
The vast majority of partner co-investment vehicles I've come across contain partners' capital. A rounding error may be from associates, who are usually counted against the limited number of unaccredited investors such funds can, with great legal liability, be marketed to.
That said, contrast the S&L crisis [3] with Bernie Madoff's fraud [4]. The former lost $160 billion of regular Joes' money (along with wealthy investors'). $132 billion of taxpayer money had to be spent, alongside countless hours of regulators', judges' and lawmakers' time, again, on the public dime. A minor political crisis started (and subsided).
With the latter, $70 billion was lost (though it might have been as "small" as $20 billion). Prosecutors and judges still got involved, but fines repaid their efforts. Systemic effects were largely contained.
TL; DR We restrict the masses from illiquid investments procured through irregular channels because (1) the legal costs of diligence preclude small investments, meaning small investors either invest at a material disadvantage or invest too much (relative to their worth) and (2) the lower your worth, the higher the probability that a busted investment will lose you your shirt. That turns a financial problem into a de-stabilising political problem.
Side note: early-stage investing isn't as profitable, on a risk-adjusted basis, as it might seem if one only counts the winners.
[1] https://www.sec.gov/fast-answers/answers-accredhtm.html
[2] http://www.finra.org/industry/qualification-exams
[3] https://en.wikipedia.org/wiki/Savings_and_loan_crisis
[4] https://en.wikipedia.org/wiki/Bernard_Madoff#Size_of_loss_to...
Disclaimer: I am not a lawyer. This is not legal, nor any other kind, of advice. Consult an investment adviser and a securities lawyer before making risky investments.